TECHNICAL EXPLANATION OF THE TAX

AND PENSION PROVISIONS OF H.R. 3108,

THE “PENSION STABILITY ACT,”

AS PASSED BY THE SENATE

ON JANUARY 28, 2004

Prepared by

the Staff of the

JOINT COMMITTEE ON TAXATION

February 9, 2004

JCX-12-04
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

EXPLANATION OF TAX AND PENSION PROVISIONS......................................................... 2

A. Temporary Replacement of Interest Rate Used for Certain Pension Plan Purposes

and Alternative Deficit Reduction Contribution for Certain Plans (secs. 2-3 of 

 the bill, secs. 412 and 415 of the Code, and secs. 302 and 4006 of ERISA)...................... 2

B. Multiemployer Plan Funding Notices (sec. 4 of the bill and sec. 104 of ERISA)............ 11

C. Amortization Hiatus for Net Experience Losses in Multiemployer Plans 

 (sec. 5 of the bill, sec. 412 of the Code, and sec. 302 of ERISA)..................................... 13

D. Two-Year Extension of Transition Rule to Pension Funding Requirements 

 (sec. 6 of the bill and sec. 769(c) of the Retirement Protection Act of 1994) .................. 16

E. Procedures Applicable to Disputes Involving Pension Plan Withdrawal Liability

 (sec. 7 of the bill and sec. 4221 of ERISA) ...................................................................... 18

F. Sense of the Senate on the Status of Private Pension Plans (sec. 8 of the bill) ................ 20

G. Extension of Provision Permitting Qualified Transfers of Excess Pension Assets

 to Retiree Health Accounts (sec. 9 of the bill, sec. 420 of the Code, and 

 secs. 101, 403, and 408 of ERISA)................................................................................... 22

H. Modify Qualification Rules for Tax-Exempt Property and Casualty Insurance 

 Companies (sec. 10 of the bill and secs. 501 and 831 of the Code) ................................. 24

I. Definition of Insurance Company for Property and Casualty Insurance Company 

 Tax Rules (sec. 11 of the bill and sec. 831 of the Code) .................................................. 26
1

INTRODUCTION

H.R. 3108, the “Pension Funding Equity Act of 2003,” was passed by the House of 

Representatives on October 8, 2003. On January 28, 2004, the Senate passed an amendment to 

H.R. 3108, the “Pension Stability Act.” This document,1 prepared by the staff of the Joint 

Committee on Taxation, provides a technical explanation of the tax and pension provisions of 

H.R. 3108, the “Pension Stability Act,” as passed by the Senate on January 28, 2004.2

 

1

 This document may be cited as follows: Joint Committee on Taxation, Technical 

Explanation of the Tax and Pension Provisions of H.R. 3108, the “Pension Stability Act,” as 

Passed by the Senate on January 28, 2004 (JCX-12-04), February 9, 2004.

2

 In addition to the tax and pension provisions of the bill, section 12 of the bill repeals 

section 105 of the Miscellaneous Appropriations and Offsets Act, 2004, i.e., Division H of the 

Consolidated Appropriations Act, 2004 (the “Act”), Pub. L. No. 108-199, relating to the use of 

funds made available under the Act to implement measures to reduce overfishing and promote 

rebuilding of certain fish stocks.
2

EXPLANATION OF TAX AND PENSION PROVISIONS

A. Temporary Replacement of Interest Rate Used for Certain Pension Plan Purposes

and Alternative Deficit Reduction Contribution for Certain Plans

(secs. 2-3 of the bill, secs. 412 and 415 of the Code, and secs. 302 and 4006 of ERISA)

Present Law

In general

Under present law, the interest rate on 30-year Treasury securities is used for several 

purposes related to defined benefit plans. Specifically, the interest rate on 30-year Treasury 

securities is used: (1) in determining current liability for purposes of the funding and deduction 

rules; (2) in determining unfunded vested benefits for purposes of Pension Benefit Guaranty 

Corporation (“PBGC”) variable rate premiums; and (3) in determining the minimum required 

value of lump sum distributions from a defined benefit plan and maximum lump sum values for 

purposes of the limits on benefits payable under a defined benefit plan.

The IRS publishes the interest rate on 30-year Treasury securities on a monthly basis. 

The Department of the Treasury does not currently issue 30-year Treasury securities. As of 

March 2002, the IRS publishes the average yield on the 30-year Treasury bond maturing in 

February 2031 as a substitute. 

Funding rules

In general

The Internal Revenue Code (the “Code”) and the Employee Retirement Income Security 

Act of 1974 (“ERISA”) impose both minimum and maximum3 funding requirements with 

respect to defined benefit plans.4 Under the minimum funding rules, the amount of contributions 

required for a plan year is generally the plan’s normal cost for the year (i.e., the cost of benefits 

allocated to the year under the plan’s funding method) plus that year’s portion of other liabilities 

that are amortized over a period of years, such as benefits resulting from a grant of past service 

credit.

Additional contributions for underfunded plans

Under special funding rules (referred to as the “deficit reduction contribution” rules),5 an 

additional contribution to a plan is generally required if the plan’s funded current liability 

 

3

 The maximum funding requirement for a defined benefit plan is referred to as the full 

funding limitation, discussed below.

4

 Code sec. 412; ERISA sec. 302.

5

 The deficit reduction contribution rules apply to single-employer plans, other than 

single-employer plans with no more than 100 participants on any day in the preceding plan year. 
3

percentage is less than 90 percent.6 A plan’s “funded current liability percentage” is the actuarial 

value of plan assets (i.e., the average fair market value over a period of years) as a percentage of 

the plan’s current liability. In general, a plan’s current liability means all liabilities to employees 

and their beneficiaries under the plan.

The amount of the additional contribution required under the deficit reduction 

contribution rules is the sum of two amounts: (1) the excess, if any, of (a) the deficit reduction 

contribution (as described below), over (b) the contribution required under the normal funding 

rules; and (2) the amount (if any) required with respect to unpredictable contingent event 

benefits.7 The amount of the additional contribution cannot exceed the amount needed to 

increase the plan’s funded current liability percentage to 100 percent.

The deficit reduction contribution is the sum of (1) the “unfunded old liability amount,” 

(2) the “unfunded new liability amount,” and (3) the expected increase in current liability due to 

benefits accruing during the plan year.8 The “unfunded old liability amount” is the amount 

needed to amortize certain unfunded liabilities under 1987 and 1994 transition rules. The 

“unfunded new liability amount” is the applicable percentage of the plan’s unfunded new 

liability. Unfunded new liability generally means the unfunded current liability of the plan (i.e., 

the amount by which the plan’s current liability exceeds the actuarial value of plan assets), but 

determined without regard to certain liabilities (such as the plan’s unfunded old liability and 

unpredictable contingent event benefits). The applicable percentage is generally 30 percent, but 

is reduced if the plan’s funded current liability percentage is greater than 60 percent. 

Required interest rate and mortality table

Specific interest rate and mortality assumptions must be used in determining a plan’s 

current liability for purposes of the special funding rule. The interest rate used to determine a 

 

Single-employer plans with more than 100 but not more than 150 participants are generally 

subject to lower contribution requirements under these rules.

6

 Under an alternative test, a plan is not subject to the deficit reduction contribution rules 

for a plan year if (1) the plan’s funded current liability percentage for the plan year is at least 80 

percent, and (2) the plan’s funded current liability percentage was at least 90 percent for each of 

the two immediately preceding plan years or each of the second and third immediately preceding 

plan years.

7

 A plan may provide for unpredictable contingent event benefits, which are benefits that 

depend on contingencies that are not reliably and reasonably predictable, such as facility 

shutdowns or reductions in workforce. An additional contribution is generally not required with 

respect to unpredictable contingent event benefits unless the event giving rise to the benefits has 

occurred.

8

 If the Secretary of the Treasury prescribes a new mortality table to be used in 

determining current liability, as described below, the deficit reduction contribution may include 

an additional amount.
4

plan’s current liability must be within a permissible range of the weighted average9 of the 

interest rates on 30-year Treasury securities for the four-year period ending on the last day before 

the plan year begins. The permissible range is generally from 90 percent to 105 percent.10 The 

interest rate used under the plan must be consistent with the assumptions which reflect the 

purchase rates which would be used by insurance companies to satisfy the liabilities under the 

plan.11

The Job Creation and Worker Assistance Act of 200212 amended the permissible range of 

the statutory interest rate used in calculating a plan’s current liability for purposes of applying 

the additional contribution requirements. Under this provision, the permissible range is from 

90 percent to 120 percent for plan years beginning after December 31, 2001, and before 

January 1, 2004.

The Secretary of the Treasury is required to prescribe mortality tables and to periodically 

review (at least every five years) and update such tables to reflect the actuarial experience of 

pension plans and projected trends in such experience.13 The Secretary of the Treasury has 

required the use of the 1983 Group Annuity Mortality Table.14

Full funding limitation

No contributions are required under the minimum funding rules in excess of the full 

funding limitation. In 2004 and thereafter, the full funding limitation is the excess, if any, of 

(1) the accrued liability under the plan (including normal cost), over (2) the lesser of (a) the 

market value of plan assets or (b) the actuarial value of plan assets. However, the full funding 

limitation may not be less than the excess, if any, of 90 percent of the plan’s current liability 

 

9

 The weighting used for this purpose is 40 percent, 30 percent, 20 percent and 10 

percent, starting with the most recent year in the four-year period. Notice 88-73, 1988-2 C.B. 

383.

10 If the Secretary of the Treasury determines that the lowest permissible interest rate in 

this range is unreasonably high, the Secretary may prescribe a lower rate, but not less than 80 

percent of the weighted average of the 30-year Treasury rate.

11 Code sec. 412(b)(5)(B)(iii)(II); ERISA sec. 302(b)(5)(B)(iii)(II). Under Notice 90-11, 

1990-1 C.B. 319, the interest rates in the permissible range are deemed to be consistent with the 

assumptions reflecting the purchase rates that would be used by insurance companies to satisfy 

the liabilities under the plan.

12 Pub. L. No. 107-147.

13 Code sec. 412(l)(7)(C)(ii); ERISA sec. 302(d)(7)(C)(ii).

14 Rev. Rul. 95-28, 1995-1 C.B. 74. The IRS and the Treasury Department have 

announced that they are undertaking a review of the applicable mortality table and have 

requested comments on related issues, such as how mortality trends should be reflected. 

Notice 2003-62, 2003-38 I.R.B. 576; Announcement 2000-7, 2000-1 C.B. 586.
5

(including the current liability normal cost) over the actuarial value of plan assets. In general, 

current liability is all liabilities to plan participants and beneficiaries accrued to date, whereas the

accrued liability under the full funding limitation may be based on projected future benefits, 

including future salary increases. 15

Timing of plan contributions

In general, plan contributions required to satisfy the funding rules must be made within 

81⁄2 months after the end of the plan year. If the contribution is made by such due date, the 

contribution is treated as if it were made on the last day of the plan year.

In the case of a plan with a funded current liability percentage of less than 100 percent for 

the preceding plan year, estimated contributions for the current plan year must be made in 

quarterly installments during the current plan year.16 The amount of each required installment is 

25 percent of the lesser of (1) 90 percent of the amount required to be contributed for the current 

plan year or (2) 100 percent of the amount required to be contributed for the preceding plan 

year.17

Deductions for contributions

Employer contributions to qualified retirement plans are deductible, subject to certain 

limits. In the case of a defined benefit plan, the employer generally may deduct the greater of: 

(1) the amount necessary to satisfy the minimum funding requirement of the plan for the year; or 

(2) the amount of the plan’s normal cost for the year plus the amount necessary to amortize 

 

15 For plan years beginning before 2004, the full funding limitation was generally 

defined as the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including 

normal cost) or (b) a percentage (170 percent for 2003) of the plan’s current liability (including 

the current liability normal cost), over (2) the lesser of (a) the market value of plan assets or 

(b) the actuarial value of plan assets, but in no case less than the excess, if any, of 90 percent of 

the plan’s current liability over the actuarial value of plan assets. Under the Economic Growth 

and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the full funding limitation based on 

170 percent of current liability is repealed for plan years beginning in 2004 and thereafter. The 

provisions of EGTRRA generally do not apply for years beginning after December 31, 2010.

16 Code sec. 412(m); ERISA sec. 302(e).

17 In connection with the expanded interest rate range available for 2002 and 2003, 

special rules apply in determining current liability for the preceding plan year for purposes of 

applying the quarterly contributions requirements to plan years beginning in 2002 (when the 

expanded range first applies) and 2004 (when the expanded range no longer applies). In each of 

those years (“present year”), current liability for the preceding year is redetermined, using the 

permissible range applicable to the present year. This redetermined current liability will be used 

for purposes of the plan’s funded current liability percentage for the preceding year, which may 

affect the need to make quarterly contributions, and for purposes of determining the amount of 

any quarterly contributions in the present year, which is based in part on the preceding year.
6

certain unfunded liabilities over ten years.18 In addition, the maximum amount of deductible 

contributions is generally the greater of: (1) the full funding limitation for the year; or (2) the 

plan’s unfunded current liability.19

PBGC premiums

Because benefits under a defined benefit plan may be funded over a period of years, plan 

assets may not be sufficient to provide the benefits owed under the plan to employees and their 

beneficiaries if the plan terminates before all benefits are paid. The PBGC generally insures the 

benefits owed under defined benefit plans (up to certain limits) in the event the plan is terminated 

with insufficient assets. Employers pay premiums to the PBGC for this insurance coverage.

PBGC premiums include a flat-rate premium and, in the case of an underfunded plan, a 

variable rate premium based on the amount of unfunded vested benefits.20 In determining the 

amount of unfunded vested benefits, the interest rate used is 85 percent of the annual yield on 

30-year Treasury securities for the month preceding the month in which the plan year begins.

Under the Job Creation and Worker Assistance Act of 2002, for plan years beginning 

after December 31, 2001, and before January 1, 2004, the interest rate used in determining the 

amount of unfunded vested benefits for PBGC variable rate premium purposes is increased to 

100 percent of the annual yield on 30-year Treasury securities for the month preceding the month 

in which the plan year begins.

Lump-sum distributions

Accrued benefits under a defined benefit plan generally must be paid in the form of an 

annuity for the life of the participant unless the participant consents to a distribution in another 

form. Defined benefit plans generally provide that a participant may choose among other forms 

of benefit offered under the plan, such as a lump sum distribution. These optional forms of 

benefit generally must be actuarially equivalent to the life annuity benefit payable to the 

participant.

A defined benefit plan must specify the actuarial assumptions that will be used in 

determining optional forms of benefit under the plan in a manner that precludes employer 

discretion in the assumptions to be used. For example, a plan may specify that a variable interest 

rate will be used in determining actuarial equivalent forms of benefit, but may not give the 

employer discretion to choose the interest rate.

 

18 Code sec. 404(a)(1).

19 In the case of a plan that terminates during the year, the maximum deductible amount 

is generally not less than the amount needed to make the plan assets sufficient to fund benefit 

liabilities as defined for purposes of the PBGC termination insurance program.

20 ERISA sec. 4006.
7

Statutory assumptions must be used in determining the minimum value of certain 

optional forms of benefit, such as a lump sum.21 That is, the lump sum payable under the plan 

may not be less than the amount of the lump sum that is actuarially equivalent to the life annuity 

payable to the participant, determined using the statutory assumptions. The statutory 

assumptions consist of an applicable mortality table (as published by the IRS) and an applicable 

interest rate.

The applicable interest rate is the annual interest rate on 30-year Treasury securities, 

determined as of the time that is permitted under regulations. The regulations provide various 

options for determining the interest rate to be used under the plan, such as the period for which 

the interest rate will remain constant (“stability period”) and the use of averaging.

Limits on benefits 

Annual benefits payable under a defined benefit plan generally may not exceed the lesser 

of (1) 100 percent of average compensation, or (2) $165,000 (for 2004).22 The dollar limit 

generally applies to a benefit payable in the form of a straight life annuity beginning no earlier 

than age 62. The limit is reduced if benefits are paid before age 62. In addition, if the benefit is 

not in the form of a straight life annuity, the benefit generally is adjusted to an equivalent straight 

life annuity. In making these reductions and adjustments, the interest rate used generally must be 

not less than the greater of: (1) five percent; or (2) the interest rate specified in the plan. 

However, for purposes of adjusting a benefit in a form that is subject to the minimum value rules 

(including the use of the interest rate on 30-year Treasury securities), such as a lump-sum 

benefit, the interest rate used must be not less than the greater of: (1) the interest rate on 30-year 

Treasury securities; or (2) the interest rate specified in the plan.

Explanation of Provision

Interest rate for determining current liability and PBGC premiums

For plan years beginning in 2004 or 2005, the provision changes the interest rate used in 

determining current liability for funding purposes and in determining PBGC variable rate 

premiums.23 For these purposes, the provision replaces the interest rate on 30-year Treasury 

securities with a conservative long-term bond rate reflecting the rates of interest on amounts 

invested conservatively in long-term corporate bonds and based on the use of two or more 

indices that are in the top two quality levels available reflecting average maturities of 20 years or 

more. The Secretary of the Treasury is directed to prescribe by regulation a method for 

periodically determining conservative long-term corporate bond rates.

 

21 Code sec. 417(e)(3); ERISA sec. 205(g)(3).

22 Code sec. 415(b).

23 The provision also repeals the present-law rule under which, for purposes of applying 

the quarterly contributions requirements to plan years beginning in 2004, current liability for the 

preceding year is redetermined.
8

For purposes of determining a plan’s current liability for plan years beginning in 2004 or 

2005, the interest rate used must be within a permissible range of the weighted average of the 

conservative long-term corporate bond rates during the four-year period ending on the last day 

before the plan year begins. The permissible range applicable under the provision is from 90 

percent to 100 percent.

The temporary interest rate change generally applies also in determining current liability 

for purposes of applying the limits on deductible contributions (regardless of whether the plan is 

subject to the deficit reduction contribution requirements). However, under the provision, an 

employer may elect to disregard the temporary interest rate change for purposes of determining 

the maximum amount of deductible contributions (regardless of whether the plan is subject to the 

deficit reduction contribution requirements). In such a case, the present-law interest rate rules 

apply, i.e., the interest rate used in determining current liability for that purpose must be within 

the permissible range (90 to 105 percent) of the weighted average of the interest rates on 30-year 

Treasury securities for the preceding four-year period.

In determining the amount of unfunded vested benefits for PBGC variable rate premium 

purposes for plan years beginning in 2004 or 2005, the interest rate used is 85 percent of the 

annual yield computed by using the conservative long-term corporate bond rate for the month 

preceding the month in which the plan year begins.

Interest rate for applying limits on benefits

Under the provision, in the case of plan years beginning in 2004 or 2005, in adjusting a 

form of benefit that is subject to the minimum value rules, such as a lump-sum benefit, for 

purposes of applying the limits on benefits payable under a defined benefit plan, the interest rate 

used must be not less than the greater of: (1) 5.5 percent; or (2) the interest rate specified in the 

plan.

Alternative deficit reduction contribution for certain plans

In general

The provision allows certain employers (“applicable employers”) to elect a reduced 

amount of additional required contribution under the deficit reduction contribution rules (an 

“alternative deficit reduction contribution”) with respect to certain plans for applicable plan 

years. An applicable plan year is a plan year beginning after December 27, 2003, and before 

December 28, 2005, for which the employer elects the application of the provision. If an 

employer so elects, the amount of the additional deficit reduction contribution for an applicable 

plan year is the greater of: (1) 20 percent (40 percent in the case of a plan year beginning after 

December 27, 2004) of the amount of the additional contribution that would be required without 

regard to the provision; or (2) the additional contribution that would be required if the deficit 

reduction contribution for the plan year were determined as the expected increase in current 

liability due to benefits accruing during the plan year.

An election under the provision may be made only with respect to a plan that was not 

subject to the deficit reduction contribution rules for the plan year beginning in 2000. An 
9

election may not be made with respect to more than two plan years. An election under the 

provision is to be made at such time and in such manner as the Secretary of the Treasury 

prescribes. An election under the provision does not invalidate any obligation pursuant to a 

collective bargaining agreement in effect on the date of the election to provide benefits, to 

change the accrual of benefits, or to change the rate at which benefits vest under the plan. 

Under the provision, an applicable employer is an employer that is: (1) a commercial 

passenger airline; (2) primarily engaged in the production or manufacture of a steel mill product, 

or in the mining or processing of iron ore or beneficiated iron ore products; or (3) an 

organization described in section 501(c)(5) that established the plan to which the provision 

applies on June 30, 1955. In addition, an employer not described in the preceding sentence is 

treated as an applicable employer if the employer files an application (at such time and in such 

manner as the Secretary of the Treasury prescribes) to be treated as an applicable employer. 

However, an employer making such an application is not treated as an applicable employer if, 

within 90 days of the application, the Secretary determines (taking into account the application 

of the provision) that there is a reasonable likelihood that the employer will be unable to make 

required future contributions to the plan in a timely manner.

Restrictions on amendments

Under the provision, certain plan amendments may not be adopted during an applicable 

plan year (i.e., a plan year for which an alternative deficit reduction contribution is elected). This 

restriction applies to an amendment that increases the liabilities of the plan by reason of any 

increase in benefits, any change in the accrual of benefits, or any change in the rate at which 

benefits vest under the plan. The restriction applies unless: (1) the plan’s funded current 

liability percentage as of the end of the aplicable plan year is projected to be at least 75 percent 

(taking into account the effect of the amendment); (2) the amendment provides for an increase in 

benefits under a formula that is not based on a participant’s compensation, but only if the rate of 

the increase does not exceed the contemporaneous rate of increase in average wages of 

participants covered by the amendment; (3) the amendment is required by a collective bargaining 

agreement that is in effect on the date of enactment of the provision; (4) the amendment is 

determined by the Secretary of Labor to be reasonable and provides for only de minimis 

increases in plan liabilities; or (5) the amendment is required as a condition of qualified 

retirement plan status.

If a plan is amended during an applicable plan year in violation of the provision, an 

election of an alternative deficit reduction contribution under the provision does not apply to any 

applicable plan year ending on after the date on which the amendment is adopted. 

Notice requirement

The bill amends ERISA to provide that, if an employer elects an alternative deficit 

reduction contribution for any applicable plan year, the employer must provide written notice of 

the election to participants and beneficiaries within 30 days of filing the election (120 days in the 

case of an employer that files an application to be treated as an applicable employer). The notice 

to participants must include: (1) the due date of the alternative deficit reduction contribution; 

(2) the amount by which the required contribution to the plan was reduced as a result of the 
10

election; (3) a description of the benefits under the plan that are eligible for guarantee by the 

PBGC; and (4) an explanation of the limitations on the PBGC guarantee and the circumstances 

in which the limitations apply, including the maximum guaranteed monthly benefits that the 

PBGC would pay if the plan terminated while underfunded. An employer that fails to provide 

the required notice to a participant or beneficiary may (in the discretion of a court) be liable to 

the participant or beneficiary in the amount of up to $100 a day from the date of the failure, and 

the court may in its discretion order such other relief as it deems proper.

The bill also amends ERISA to require that an employer electing an alternative deficit 

reduction contribution for any year must provide written notice of the election to the PBGC 

within 30 days of the election (120 days in the case of an employer that files an application to be 

treated as an applicable employer). The notice to the PBGC must include: (1) the due date of the 

alternative deficit reduction contribution; (2) the amount by which the required contribution to 

the plan was reduced as a result of the election; (3) the number of years it will take to restore the 

plan to full funding if the employer makes only the required contributions; and (4) information as 

to how the amount by which the plan is underfunded compares with the capitalization of the 

employer.

Effective Date

Interest rate

The provision providing a temporary replacement interest rate is generally effective for 

plan years beginning after December 31, 2003.

For purposes of applying certain rules (“lookback rules”) to plan years beginning after 

December 31, 2003, the amendments made by the provision may be applied as if they had been 

in effect for all prior plan years. Under the provision, the lookback rules are: (1) the rule under 

which a plan is not subject to the deficit reduction contribution requirements for a plan year if the 

plan’s funded current liability percentage was at least 90 percent for each of the two immediately 

preceding plan years or each of the second and third immediately preceding plan years; and 

(2) the rule under which quarterly contributions are required for a plan year if the plan’s funded 

current liability percentage was less than 100 percent for the preceding plan year.

In the case of a distribution made to a participant or beneficiary after December 31, 2003, 

and before January 1, 2005, in a form of benefit that is subject to the minimum value rules, such 

as a lump-sum benefit, and that is subject to adjustment in applying the limit on benefits payable 

under a defined benefit plan, the amount payable may not, solely by reason of the provision, be 

less than the amount that would have been payable if the amount payable had been determined 

using the applicable interest rate in effect as of the last day of the last plan year beginning before 

January 31, 2004.

Alternative deficit reduction requirement for certain plans

The provision relating to the election of an alternative deficit reduction contribution for 

certain plans is effective on the date of enactment.
11

B. Multiemployer Plan Funding Notices

(sec. 4 of the bill and sec. 104 of ERISA)

Present Law

Under present law, defined benefit plans are generally required to meet certain minimum 

funding rules. These rules are designed to help ensure that such plans are adequately funded. 

Both single-employer plans and multiemployer plans are subject to minimum funding 

requirements; however, the requirements are different for each type of plan.

Similarly, the Pension Benefit Guaranty Corporation (“PBGC”) insures certain benefits 

under both single-employer and multiemployer defined benefit plans, but the rules relating to the 

guarantee vary for each type of plan. In the case of multiemployer plans, the PBGC guarantees 

against plan insolvency. Under its multiemployer program, PBGC provides financial assistance 

through loans to plans that are insolvent (that is, plans that are unable to pay basic PBGCguaranteed benefits when due). 

Employers maintaining single-employer defined benefit plans are required to provide 

certain notices to plan participants relating to the funding status of the plan. For example, 

ERISA requires an employer of a single-employer defined benefit plan to notify plan participants 

if the employer fails to make required contributions (unless a request for a funding waiver is 

pending).24 In addition, in the case of an underfunded plan for which variable rate PBGC 

premiums are required, the plan administrator generally must notify plan participants of the 

plan’s funding status and the limits on the PBGC benefit guarantee if the plan terminates while 

underfunded.25 

Explanation of Provision

In general

The provision amends ERISA to provide that the administrator of a defined benefit plan 

which is a multiemployer plan is required to provide an annual funding notice to: (1) each 

participant and beneficiary; (2) each labor organization representing such participants or 

beneficiaries; and (3) each employer that has an obligation to contribute under the plan. 

Such a notice must include: (1) identifying information, including the name of the plan, 

the address and phone number of the plan administrator and the plan’s principal administrative 

officer, each plan sponsor’s employer identification number, and the plan identification number; 

(2) a statement as to whether the plan’s funded current liability percentage for the plan year to 

which the notice relates is at least 100 percent (and if not, a statement of the percentage); (3) a 

statement of the value of the plan’s assets, the amount of benefit payments, and the ratio of the 

assets to the payments for the plan year to which the report relates; (4) a summary of the rules 

 

24 ERISA sec. 101(d). 

25 ERISA sec. 4011. Multiemployer plans are not required to pay variable rate 

premiums. 
12

governing insolvent multiemployer plans, including the limitations on benefit payments and any 

potential benefit reductions and suspensions (and the potential effects of such limitations, 

reductions, and suspensions on the plan); (5) a general description of the benefits under the plan 

which are eligible to be guaranteed by the PBGC and the limitations of the guarantee and 

circumstances in which such limitations apply; and (6) any additional information which the plan 

administrator elects to include to the extent it is not inconsistent with regulations prescribed by 

the Secretary of Labor.

The annual funding notice must be provided no later than two months after the deadline 

(including extensions) for filing the plan’s annual report for the plan year to which the notice 

relates. The funding notice must be provided in a form and manner prescribed in regulations by 

the Secretary of Labor. Additionally, it must be written so as to be understood by the average 

plan participant and may be provided in written, electronic, or some other appropriate form to the 

extent that it is reasonably accessible to persons to whom the notice is required to be provided. 

The Secretary of Labor is directed to issue regulations (including a model notice) 

necessary to implement the provision no later than one year after the date of enactment.

Sanction for failure to provide notice

In the case of a failure to provide the annual multiemployer plan funding notice, the 

Secretary of Labor may assess a civil penalty against a plan administrator of up to $100 per day 

for each failure to provide a notice. For this purpose, each violation with respect to a single 

participant or beneficiary is treated as a separate violation.

Effective Date

The provision applies to plan years beginning after December 31, 2004.
13

C. Amortization Hiatus for Net Experience Losses in Multiemployer Plans

(sec. 5 of the bill, sec. 412 of the Code, and sec. 302 of ERISA)

Present Law

General funding requirements

The Code and ERISA impose both minimum and maximum26 funding requirements with 

respect to defined benefit plans. Under the minimum funding rules, the amount of contributions 

required for a plan year is generally the plan’s normal cost for the year (i.e., the cost of benefits 

allocated to the year under the plan’s funding method) plus that year’s portion of other liabilities 

that are amortized over a period of years, such as benefits resulting from a grant of past service 

credit.27 A plan’s normal cost and other liabilities must be determined under an actuarial cost 

method permissible under the Code and ERISA.

Funding standard account

As an administrative aid in the application of the funding requirements, a defined benefit 

plan is required to maintain a special account called a “funding standard account” to which 

specified charges and credits (including credits for contributions to the plan), plus interest, are 

made for each plan year. If, as of the close of a plan year, the account reflects credits equal to or 

in excess of charges, the plan is generally treated as meeting the minimum funding standard for 

the year. Thus, as a general rule, the minimum contribution for a plan year is determined as the 

amount by which the charges to the account would exceed credits to the account if no 

contribution were made to the plan. If, as of the close of the plan year, charges to the funding 

standard account exceed credits to the account, then the excess is referred to as an “accumulated 

funding deficiency.”28

Experience gains and losses

In determining plan funding under an actuarial cost method, a plan’s actuary generally 

makes certain assumptions regarding the future experience of a plan. These assumptions 

typically involve rates of interest, mortality, disability, salary increases, and other factors 

affecting the value of assets and liabilities, such as increases or decreases in asset values. The 

actuarial assumptions are required to be reasonable and may be subject to other restrictions. If, 

 

26 The maximum funding requirement for a defined benefit plan is referred to as the full 

funding limitation.

27 Under special funding rules (referred to as the “deficit reduction contribution” rules), 

an additional contribution may be required to a single-employer plan if the plan’s funded current 

liability percentage is less than 90 percent. The deficit reduction contribution rules do not apply 

to multiemployer plans.

28 In addition to the funding standard account, a reconciliation account is sometimes used 

to balance certain items for purposes of reporting actuarial information about the plan on the 

plan’s annual report (Schedule B of Form 5500).
14

on the basis of these assumptions, the contributions made to the plan result in actual unfunded 

liabilities that are less than those anticipated by the actuary, then the excess is an experience 

gain. If the actual unfunded liabilities are greater than those anticipated, then the difference is an 

experience loss.

If a plan has a net experience gain, the funding standard account is credited with the 

amount needed to amortize the net experience gain over a certain period. If a plan has a net 

experience loss, the funding standard account is charged with the amount needed to amortize the 

net experience loss over a certain period. In the case of a multiemployer plan, the amortization 

period for net experience gains and losses is 15 years.

Excise tax 

An employer is generally subject to an excise tax if it fails to make minimum required 

contributions and fails to obtain a waiver from the IRS.29 The excise tax is 10 percent of the 

amount of the funding deficiency (five percent in the case of a multiemployer plan). In addition, 

a tax of 100 percent may be imposed if the funding deficiency is not corrected within a certain 

period.

Explanation of Provision

The provision allows certain multiemployer plans to elect to defer the beginning of the 

amortization of certain net experience losses for up to three plan years. The period during which 

the amortization of a net experience loss is deferred by reason of such an election is referred to as 

a “hiatus period.” The provision applies to a multiemployer plan that has a net experience loss 

for any plan year beginning after June 30, 2002, and before July 1, 2006. Such a plan may elect 

to begin the 15-year amortization period with respect to such a loss in any of the three 

immediately succeeding plan years as selected by the plan. A plan may elect to delay the 

beginning of the amortization of net experience losses with respect to net experience losses 

occurring for only two plan years beginning after June 30, 2002, and before July 1, 2006 

(regardless of the number of plan years in that period for which the plan has net experience 

losses). An election under the provision is to be made at such time and in such manner as the 

Secretary of Labor prescribes, after consultation with the Secretary of the Treasury.

If an election under the provision is made, the net experience loss is treated, for purposes 

of determining any charge to the funding standard account (or interest) with respect to the loss, 

in the same manner as if the net experience loss occurred in the year selected by the plan for the 

amortization period to begin (without regard to any net experience loss or gain otherwise 

determined for such year). Interest accrued on any net experience loss during a hiatus period is 

charged to a reconciliation account and not to the funding standard account.

Under the provision, certain plan amendments may not take effect for any plan year in the 

hiatus period. This restriction applies to an amendment that increases the liabilities of the plan 

by reason of any increase in benefits, any change in the accrual of benefits, or any change in the 

 

29 Sec. 4971.
15

rate at which benefits vest under the plan. The restriction applies unless: (1) the plan’s funded 

current liability percentage as of the end of the plan year is projected to be at least 75 percent 

(taking into account the effect of the amendment); (2) the plan’s actuary certifies that, due to an 

increase in the rates of contributions to the plan, the normal cost attributable to the benefit 

increase or other change is expected to be fully funded in the year following the year in which 

the increase or other change takes effect, and any increase in the plan’s accrued liabilities 

attributable to the benefit increase or other change is expected to be fully funded by the end of 

the third plan year following the end of the plan hiatus period of the plan; (3) the amendment is 

determined by the Secretary of Labor to be reasonable and provides for only de minimis 

increases in plan liabilities; or (4) the amendment is required as a condition of qualified 

retirement plan status. The restriction on amendments does not apply to an increase in benefits 

for a group of participants resulting solely from a collectively bargained increase in the 

contributions on their behalf. Under the provision, failure to comply with this restriction is a 

violation of ERISA and of the qualification requirements of the Code.

If a plan elects to defer the beginning of an amortization period under the provision, the 

plan administrator must provide written notice of the election within 30 days to participants and 

beneficiaries, to each labor organization representing participants and beneficiaries, and to each 

employer that has an obligation to contribute under the plan. The notice must include: (1) the 

amount of the net experience loss to be deferred under the election and the period of the deferral; 

and (2) the maximum guaranteed monthly benefits that the PBGC would pay if the plan 

terminated while underfunded. If a plan administrator fails to comply with the notice 

requirement under the provision, the Secretary of Labor may assess a civil penalty of not more 

than $1,000 a day for each violation.

Effective Date

The provision is effective on the date of enactment.
16

D. Two-Year Extension of Transition Rule to Pension Funding Requirements

(sec. 6 of the bill and sec. 769(c) of the Retirement Protection Act of 1994)

Present Law

Under present law, defined benefit plans are required to meet certain minimum funding 

rules. In some cases, additional contributions are required if a defined benefit plan is 

underfunded. Additional contributions generally are not required in the case of a plan with a 

funded current liability percentage of at least 90 percent. A plan’s funded current liability 

percentage is the value of plan assets as a percentage of current liability. In general, a plan’s 

current liability means all liabilities to employees and their beneficiaries under the plan. In the 

case of a plan with a funded current liability percentage of less than 100 percent for the 

preceding plan year, estimated contributions for the current plan year must be made in quarterly 

installments during the current plan year.

The PBGC insures benefits under most single-employer defined benefit plans in the event 

the plan is terminated with insufficient assets to pay for plan benefits. The PBGC is funded in 

part by a flat-rate premium per plan participant, and a variable rate premium based on the 

amount of unfunded vested benefits under the plan. A specified interest rate and a specified 

mortality table apply in determining unfunded vested benefits for this purpose.

Under present law, a special rule modifies the minimum funding requirements in the case 

of certain plans. The special rule applies in the case of plans that (1) were not required to pay a 

variable rate PBGC premium for the plan year beginning in 1996, (2) do not, in plan years 

beginning after 1995 and before 2009, merge with another plan (other than a plan sponsored by 

an employer that was a member of the controlled group of the employer in 1996), and (3) are 

sponsored by a company that is engaged primarily in interurban or interstate passenger bus 

service.

The special rule treats a plan to which it applies as having a funded current liability 

percentage of at least 90 percent for plan years beginning after 1996 and before 2005 if for such 

plan year the funded current liability percentage is at least 85 percent. If the funded current 

liability of the plan is less than 85 percent for any plan year beginning after 1996 and before 

2005, the relief from the minimum funding requirements applies only if certain specified 

contributions are made.

For plan years beginning after 2004 and before 2010, the funded current liability 

percentage will be deemed to be at least 90 percent if the actual funded current liability 

percentage is at least at certain specified levels. The relief from the minimum funding 

requirements applies for a plan year beginning in 2005, 2006, 2007, or 2008 only if contributions 

to the plan for the plan year equal at least the expected increase in current liability due to benefits 

accruing during the plan year.

Explanation of Provision

The provision modifies the special funding rules for plans sponsored by a company 

engaged primarily in interurban or interstate passenger bus service by providing that, for plan 
17

years beginning in 2004 and 2005, the funded current liability percentage of the plan will be 

treated as at least 90 percent for purposes of determining the amount of required contributions 

(100 percent for purposes of determining whether quarterly contributions are required). As a 

result, for these years, additional contributions and quarterly contributions are not required with 

respect to the plan. In addition, for these years, the mortality table used under the plan is used in 

determining the amount of unfunded vested benefits under the plan for purposes of calculating 

PBGC variable rate premiums.

Effective Date

The provision is effective with respect to plan years beginning after December 31, 2003.
18

E. Procedures Applicable to Disputes Involving Pension Plan Withdrawal Liability

(sec. 7 of the bill and sec. 4221 of ERISA)

Present Law

Under ERISA, when an employer withdraws from a multiemployer plan, the employer is 

generally liable for its share of unfunded vested benefits, determined as of the date of withdrawal 

(generally referred to as the “withdrawal liability”). Whether and when a withdrawal has 

occurred and the amount of the withdrawal liability is determined by the plan sponsor. The plan

sponsor’s assessment of withdrawal liability is presumed correct unless the employer shows by a 

preponderance of the evidence that the plan sponsor’s determination of withdrawal liability was 

unreasonable or clearly erroneous. A similar standard applies in the event the amount of the 

plan’s unfunded vested benefits is challenged. 

The first payment of withdrawal liability determined by the plan sponsor is due no later 

than 60 days after demand, even if the employer contests the determination of liability. Disputes 

between an employer and plan sponsor concerning withdrawal liability are resolved through 

arbitration, which can be initiated by either party. Even if the employer contests the 

determination, payments of withdrawal liability must be made by the employer until the 

arbitrator issues a final decision with respect to the determination submitted for arbitration.

For purposes of withdrawal liability, all trades or businesses under common control are 

treated as a single employer. In addition, the plan sponsor may disregard a transaction in order 

to assess withdrawal liability if the sponsor determines that the principal purpose of the 

transaction was to avoid or evade withdrawal liability. For example, if a subsidiary of a parent 

company is sold and the subsidiary then withdraws from a multiemployer plan, the plan sponsor 

may assess withdrawal liability as if the subsidiary were still part of the parent company’s 

controlled group if the sponsor determines that a principal purpose of the sale of the subsidiary 

was to evade or avoid withdrawal liability. 

Explanation of Provision

Under the provision, a special rule may apply if a transaction is disregarded by a plan 

sponsor in determining that a withdrawal has occurred or that an employer is liable for 

withdrawal liability. If the transaction that is disregarded by the plan sponsor occurred before 

January 1, 1999, and at least five years before the date of the withdrawal, then (1) the 

determination by the plan sponsor that a principal purpose of the transaction was to evade or 

avoid withdrawal liability is not be presumed to be correct, (2) the plan sponsor, rather than the 

employer, has the burden to establish, by a preponderance of the evidence, the elements of the 

claim that a principal purpose of the transaction was to evade or avoid withdrawal liability, and 

(3) if an employer contests the plan sponsor’s determination through an arbitration proceeding, 

or through a claim brought in a court of competent jurisdiction, the employer is not obligated to 

make any withdrawal liability payments until a final decision in the arbitration proceeding, or in 

court, upholds the plan sponsor’s determination. The provision does not modify the burden of 

establishing other elements of a claim for withdrawal liability other than whether the purpose of 

the transaction was to evade or avoid withdrawal liability. 
19

Effective Date

The provision applies to an employer that receives a notification of withdrawal liability 

and demand for payment under ERISA section 4219(b)(1) after October 31, 2003.
20

F. Sense of the Senate on the Status of Private Pension Plans

(sec. 8 of the bill)

Present Law

No provision.

Explanation of Provision

The bill makes various findings of the Congress relating to the private pension system 

and the Pension Benefit Guaranty Corporation (“PBGC”) and expresses the sense of the Senate 

with respect to future legislative action.

Specifically, the bill provides that the Congress makes the following findings:

• The private pension system is integral to the retirement security of Americans, along 

with individual savings and Social Security.

• The PBGC is responsible for insuring the nation's private pension system, and 

currently insures the pensions of 34,500,000 participants in 29,500 single-employer 

plans, and 9,700,000 participants in more than 1,600 multiemployer plans;

• The PBGC announced on January 15, 2004, that it suffered a net loss in fiscal year 

2003 of $7,600,000,000 for single-employer pension plans, bringing the PBGC's 

deficit to $11,200,000,000. This deficit is the PBGC's worst on record, three times 

larger than the $3,600,000,000 deficit experienced in fiscal year 2002. 

• The PBGC also announced that the separate insurance program for multiemployer 

pension plans sustained a net loss of $419,000,000 in fiscal year 2003, resulting in a 

fiscal year-end deficit of $261,000,000. The 2003 multiemployer plan deficit is the 

first deficit in more than 20 years and is the largest deficit on record.

• The PBGC estimates that the total underfunding in multiemployer pension plans is 

roughly $100,000,000,000 and in single-employer plans is approximately 

$400,000,000,000. This underfunding is due in part to the recent decline in the stock 

market and low interest rates, but is also due to demographic changes. For example, 

in 1980, there were four active workers for every one retiree in a multiemployer plan, 

but in 2002, there was only one active worker for every one retiree.

• This pension plan underfunding is concentrated in mature and often-declining 

industries, where plan liabilities will come due sooner.

• Neither the Senate Committee on Finance nor the Senate Committee on Health, 

Education, Labor and Pensions (“HELP”), the committees of jurisdiction over 

pension matters, has held hearings this Congress nor reported legislation addressing 

the funding of multiemployer pension plans.

• The Senate is concerned about the current funding status of the private pension 

system, both single and multiemployer plans.

• The Senate is concerned about the potential liabilities facing the PBGC and, as a 

result, the potential burdens facing healthy pension plans and taxpayers.

In addition, the bill provides that it is the sense of the Senate that the Committee on 

Finance and the Committee on Health, Education, Labor and Pensions should conduct hearings 
21

on the status of multiemployer pension plans and should work in consultation with the 

Departments of Labor and Treasury on permanent measures to strengthen the integrity of the 

private pension system in order to protect the benefits of current and future pension plan 

beneficiaries.

Effective Date

The provision is effective on the date of enactment.
22

G. Extension of Provision Permitting Qualified Transfers of

Excess Pension Assets to Retiree Health Accounts

(sec. 9 of the bill, sec. 420 of the Code, and secs. 101, 403, and 408 of ERISA)

Present Law

Defined benefit plan assets generally may not revert to an employer prior to termination 

of the plan and satisfaction of all plan liabilities. In addition, a reversion may occur only if the 

plan so provides. A reversion prior to plan termination may constitute a prohibited transaction 

and may result in plan disqualification. Any assets that revert to the employer upon plan 

termination are includible in the gross income of the employer and subject to an excise tax. The 

excise tax rate is 20 percent if the employer maintains a replacement plan or makes certain 

benefit increases in connection with the termination; if not, the excise tax rate is 50 percent. 

Upon plan termination, the accrued benefits of all plan participants are required to be 100-

percent vested.

A pension plan may provide medical benefits to retired employees through a separate 

account that is part of such plan. A qualified transfer of excess assets of a defined benefit plan to 

such a separate account within the plan may be made in order to fund retiree health benefits.30 A 

qualified transfer does not result in plan disqualification, is not a prohibited transaction, and is 

not treated as a reversion. Thus, transferred assets are not includible in the gross income of the 

employer and are not subject to the excise tax on reversions. No more than one qualified transfer 

may be made in any taxable year. A qualified transfer can be made only from a single-employer 

plan.

Excess assets generally means the excess, if any, of the value of the plan’s assets31 over 

the greater of (1) the accrued liability under the plan (including normal cost) or (2) 125 percent 

of the plan’s current liability.32 In addition, excess assets transferred in a qualified transfer may 

not exceed the amount reasonably estimated to be the amount that the employer will pay out of 

such account during the taxable year of the transfer for qualified current retiree health liabilities. 

No deduction is allowed to the employer for (1) a qualified transfer or (2) the payment of 

qualified current retiree health liabilities out of transferred funds (and any income thereon).

 

30 Sec. 420.

31 The value of plan assets for this purpose is the lesser of fair market value or actuarial 

value.

32 In the case of plan years beginning before January 1, 2004, excess assets generally 

means the excess, if any, of the value of the plan’s assets over the greater of (1) the lesser of 

(a) the accrued liability under the plan (including normal cost) or (b) 170 percent of the plan’s 

current liability (for 2003), or (2) 125 percent of the plan’s current liability. The current liability 

full funding limit was repealed for years beginning after 2003. Under the general sunset 

provision of EGTRRA, the limit is reinstated for years after 2010.
23

Transferred assets (and any income thereon) must be used to pay qualified current retiree 

health liabilities for the taxable year of the transfer. Transferred amounts generally must benefit 

pension plan participants, other than key employees, who are entitled upon retirement to receive 

retiree medical benefits through the separate account. Retiree health benefits of key employees 

may not be paid out of transferred assets.

Amounts not used to pay qualified current retiree health liabilities for the taxable year of 

the transfer are to be returned to the general assets of the plan. These amounts are not includible 

in the gross income of the employer, but are treated as an employer reversion and are subject to a 

20-percent excise tax.

In order for the transfer to be qualified, accrued retirement benefits under the pension 

plan generally must be 100-percent vested as if the plan terminated immediately before the 

transfer (or in the case of a participant who separated in the one-year period ending on the date of 

the transfer, immediately before the separation). 

In order for a transfer to be qualified, the employer generally must maintain retiree health 

benefits at the same level for the taxable year of the transfer and the following four years. 

In addition, the ERISA provides that, at least 60 days before the date of a qualified 

transfer, the employer must notify the Secretary of Labor, the Secretary of the Treasury, 

employee representatives, and the plan administrator of the transfer, and the plan administrator 

must notify each plan participant and beneficiary of the transfer.33

No qualified transfer may be made after December 31, 2005. 

Explanation of Provision

The provision allows qualified transfers of excess defined benefit plan assets through 

December 31, 2013. 

Effective Date

The provision is effective on the date of enactment.

 

33 ERISA sec. 101(e). ERISA also provides that a qualified transfer is not a prohibited 

transaction under ERISA or a prohibited reversion.
24

H. Modify Qualification Rules for Tax-Exempt Property and

Casualty Insurance Companies

(sec. 10 of the bill and secs. 501 and 831 of the Code)

Present Law

A property and casualty insurance company generally is subject to tax on its taxable 

income (sec. 831(a)). The taxable income of a property and casualty insurance company is 

determined as the sum of its underwriting income and investment income (as well as gains and 

other income items), reduced by allowable deductions (sec. 832).

A property and casualty insurance company is eligible to be exempt from Federal income 

tax if its net written premiums or direct written premiums (whichever is greater) for the taxable 

year do not exceed $350,000 (sec. 501(c)(15)).

A property and casualty insurance company may elect to be taxed only on taxable 

investment income if its net written premiums or direct written premiums (whichever is greater) 

for the taxable year exceed $350,000, but do not exceed $1.2 million (sec. 831(b)).

For purposes of determining the amount of a company’s net written premiums or direct 

written premiums under these rules, premiums received by all members of a controlled group of 

corporations of which the company is a part are taken into account. For this purpose, a morethan-50-percent threshhold applies under the vote and value requirements with respect to stock 

ownership for determining a controlled group, and rules treating a life insurance company as part 

of a separate controlled group or as an excluded member of a group do not apply (secs. 

501(c)(15), 831(b)(2)(B) and 1563).

Explanation of Provision

The provision modifies the requirements for a property and casualty insurance company 

to be eligible for tax-exempt status, and to elect to be taxed only on taxable investment income. 

Under the provision, a property and casualty insurance company is eligible to be exempt 

from Federal income tax if (a) its gross receipts for the taxable year do not exceed $600,000, and 

(b) the premiums received for the taxable year are greater than 50 percent of its gross receipts. 

For purposes of determining gross receipts, the gross receipts of all members of a controlled 

group of corporations of which the company is a part are taken into account. The provision 

expands the present-law controlled group rule so that it also takes into account gross receipts of 

foreign and tax-exempt corporations. 

A company that does not meet the definition of an insurance company is not eligible to be 

exempt from Federal income tax under the provision. For this purpose, the term “insurance 

company” means any company, more than half of the business of which during the taxable year 

is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by 

insurance companies (sec. 816(a) and new sec. 831(c)). A company whose investment activities 
25

outweigh its insurance activities is not considered to be an insurance company for this purpose.34 

It is intended that IRS enforcement activities address the misuse of present-law section 

501(c)(15).

The provision also provides that a property and casualty insurance company may elect to 

be taxed only on taxable investment income if its net written premiums or direct written 

premiums (whichever is greater) do not exceed $1.2 million (without regard to whether such 

premiums exceed $350,000) (sec. 831(b)). As under present law, for purposes of determining 

the amount of a company’s net written premiums or direct written premiums under this rule, 

premiums received by all members of a controlled group of corporations (as defined in section 

831(b)) of which the company is a part are taken into account.

It is intended that regulations or other Treasury guidance provide for anti-abuse rules so 

as to prevent improper use of the provision, including, for example, by attempts to characterize 

as premiums any income that is other than premium income.

Effective Date

The provisions are effective for taxable years beginning after December 31, 2003.

 

34

 See, e.g., Inter-American Life Insurance Co. v. Comm’r, 56 T.C. 497, aff’d per curiam, 

469 F.2d 697 (9th Cir. 1972). 
26

I. Definition of Insurance Company for Property and

Casualty Insurance Company Tax Rules

(sec. 11 of the bill and sec. 831 of the Code) 

Present Law

Present law provides specific rules for taxation of the life insurance company taxable 

income of a life insurance company (sec. 801), and for taxation of the taxable income of an 

insurance company other than a life insurance company (sec. 831) (generally referred to as a 

property and casualty insurance company). For Federal income tax purposes, a life insurance 

company means an insurance company that is engaged in the business of issuing life insurance 

and annuity contracts, or noncancellable health and accident insurance contracts, and that meets 

a 50-percent test with respect to its reserves (sec. 816(a)). This statutory provision applicable to 

life insurance companies explicitly defines the term “insurance company” to mean any company, 

more than half of the business of which during the taxable year is the issuing of insurance or 

annuity contracts or the reinsuring of risks underwritten by insurance companies (sec. 816(a)).

The life insurance company statutory definition of an insurance company does not 

explicitly apply to property and casualty insurance companies, although a long-standing Treasury 

regulation35 that is applied to property and casualty companies provides a somewhat similar 

definition of an “insurance company” based on the company’s “primary and predominant 

business activity.”36 

 

35 The Treasury regulation provides that "the term ‘insurance company’ means a 

company whose primary and predominant business activity during the taxable year is the issuing 

of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. 

Thus, though its name, charter powers, and subjection to State insurance laws are significant in 

determining the business which a company is authorized and intends to carry on, it is the 

character of the business actually done in the taxable year which determines whether a company 

is taxable as an insurance company under the Internal Revenue Code." Treas. Reg. sec. 1.801-

3(a)(1). 

36 Court cases involving a determination of whether a company is an insurance company 

for Federal tax purposes have examined all of the business and other activities of the company. 

In considering whether a company is an insurance company for such purposes, courts have 

considered, among other factors, the amount and source of income received by the company 

from its different activities. See Bowers v. Lawyers Mortgage Co., 285 U.S. 182 (1932); United 

States v. Home Title Insurance Co., 285 U.S. 191 (1932). See also Inter-American Life 

Insurance Co. v. Comm’r, 56 T.C. 497, aff’d per curiam, 469 F.2d 697 (9th Cir. 1972), in which 

the court concluded that the company was not an insurance company: "The . . . financial data 

clearly indicates that petitioner’s primary and predominant source of income was from its 

investments and not from issuing insurance contracts or reinsuring risks underwritten by 

insurance companies. During each of the years in issue, petitioner’s investment income far 

exceeded its premiums and the amounts of earned premiums were de minimis during those years. 

It is equally as clear that petitioner’s primary and predominant efforts were not expended in 

issuing insurance contracts or in reinsurance. Of the relatively few policies directly written by 
27

When enacting the statutory definition of an insurance company in 1984, Congress stated, 

“[b]y requiring [that] more than half rather than the ‘primary and predominant business activity’ 

be insurance activity, the bill adopts a stricter and more precise standard for a company to be 

taxed as a life insurance company than does the general regulatory definition of an insurance 

company applicable for both life and nonlife insurance companies . . . Whether more than half 

of the business activity is related to the issuing of insurance or annuity contracts will depend on 

the facts and circumstances and factors to be considered will include the relative distribution of 

the number of employees assigned to, the amount of space allocated to, and the net income 

derived from, the various business activities.”37

Explanation of Provision

The provision provides that, for purposes of determining whether a company is a property 

and casualty insurance company, the term “insurance company” is defined to mean any 

company, more than half of the business of which during the taxable year is the issuing of 

insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. 

Thus, the provision conforms the definition of an insurance company for purposes of the rules 

taxing property and casualty insurance companies to the rules taxing life insurance companies, so 

that the definition is uniform. The provision adopts a stricter and more precise standard than the 

“primary and predominant business activity” test contained in Treasury Regulations. A company 

whose investment activities outweigh its insurance activities is not considered to be an insurance 

company under the provision.38 It is not intended that a company whose sole activity is the runoff of risks under the company’s insurance contracts be treated as a company other than an 

insurance company, even if the company has little or no premium income. 

Effective Date

The provision applies to taxable years beginning after December 31, 2003.

 

petitioner, nearly all were issued to [family members]. Also, Investment Life, in which [family 

members] each owned a substantial stock interest, was the source of nearly all of the policies 

reinsured by petitioner. These facts, coupled with the fact that petitioner did not maintain an 

active sales staff soliciting or selling insurance policies . . . , indicate a lack of concentrated effort 

on petitioner’s behalf toward its chartered purpose of engaging in the insurance business. . . . 

For the above reasons, we hold that during the years in issue, petitioner was not ‘an insurance 

company . . . engaged in the business of issuing life insurance’ and hence, that petitioner was not 

a life insurance company within the meaning of section 801." 56 T.C. 497, 507-508.

37 H.R. Rep. 98-432, part 2, at 1402-1403 (1984); S. Prt. No. 98-169, vol. I, at 525-526 

(1984); see also H.R. Rep. No. 98-861 at 1043-1044 (1985) (Conference Report).

38

 See Inter-American Life Insurance Co. v. Comm’r, supra.